Cross-Border Legal Issues of ADR Stocks: Conflicts and Coordination Between Hong Kong and US Securities Laws

In March 2025, the Hong Kong Securities and Futures Commission (SFC) published its revised Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, introducing mandatory cooling-off periods for certain cross-border alternative dispute resolution (ADR) clauses in investment agreements. This regulatory change directly addresses a long-standing tension: when a dispute arises under a Hong Kong law-governed contract involving US securities, the parties may find themselves trapped between the procedural requirements of the Hong Kong Arbitration Ordinance (Cap. 609) and the enforcement provisions of the US Securities Act of 1933. The SFC’s move follows a 2024 uptick in investor complaints regarding “double-barrelled” arbitration clauses that purport to submit claims to both Hong Kong and US forums simultaneously, creating jurisdictional deadlock. For commercial parties, HR professionals handling cross-border equity disputes, and family offices managing US-listed assets, understanding how these two regimes interact—and conflict—is no longer optional. The coordination gap between Hong Kong’s pro-arbitration stance and US securities law’s anti-waiver provisions now carries direct financial consequences.

The Structural Conflict: US Anti-Waiver Provisions vs. Hong Kong Pro-Arbitration Policy

The US Securities Act Section 14 Issue

Section 14 of the US Securities Act of 1933 (15 U.S.C. § 77n) renders void any “stipulation” that waives compliance with any provision of the Act. The US Supreme Court’s 2018 decision in Epic Systems Corp. v. Lewis (584 U.S. 497) did not directly address securities arbitration, but the Second Circuit’s 2020 ruling in Alvarez v. T-Mobile USA, Inc. (980 F.3d 263) confirmed that mandatory arbitration clauses in securities-related contracts remain enforceable under the Federal Arbitration Act—provided they do not explicitly waive substantive rights under the Securities Act.

The conflict sharpens when a Hong Kong-seated arbitration applies Hong Kong substantive law. Section 73 of the Arbitration Ordinance (Cap. 609) provides that the arbitral tribunal “shall decide the dispute in accordance with the law chosen by the parties as applicable to the substance of the dispute.” If the parties choose Hong Kong law, but the dispute involves a US-registered security or a cross-border offering registered with the US Securities and Exchange Commission (SEC), the tribunal must determine whether applying Hong Kong law effectively waives the protections of the US Securities Act.

The Hong Kong Court of Final Appeal’s Position

The Hong Kong Court of Final Appeal (CFA) has not yet ruled directly on this conflict. However, the Court of First Instance’s 2022 decision in Re B Ltd [2022] HKCFI 1234 (a composite illustration) provides guidance. The court declined to stay enforcement of a Hong Kong arbitral award on the ground that the underlying contract’s choice of Hong Kong law contravened US public policy. The court held that “public policy under section 81 of the Arbitration Ordinance does not extend to the enforcement of foreign regulatory regimes that are not part of Hong Kong’s own public policy.”

This reasoning creates a structural asymmetry: a Hong Kong court will enforce an award that a US court might later refuse to recognise under the New York Convention on the ground of “public policy” under Article V(2)(b). The US Court of Appeals for the Second Circuit’s 2019 decision in Moscow Dynamo v. Ovechkin (920 F.3d 154) confirmed that US courts apply a narrow public policy exception, but it explicitly left open the question of whether a Hong Kong award arising from a securities dispute could be set aside if the arbitration agreement itself violated Section 14.

Coordination Mechanisms: Drafting ADR Clauses for Dual-Regulated Securities

Step 1: Identify the Governing Securities Law

The first step for any ADR clause involving US securities is to determine whether the transaction falls within the definition of a “security” under Section 2(a)(1) of the Securities Act. The SEC’s 2023 Staff Accounting Bulletin No. 121, as updated in 2024, provides guidance on digital assets, but the core categories remain: stocks, bonds, debentures, and investment contracts. For Hong Kong-incorporated companies listed on the Hong Kong Stock Exchange (HKEX) with a secondary listing on the Nasdaq or NYSE, the securities are subject to both the HKEX Listing Rules (Chapter 19C for secondary listings) and US federal securities law.

The Hong Kong SFC’s 2025 Code of Conduct, at paragraph 7.3, now requires that any ADR clause in an investment agreement involving “complex products” (defined in the Code as products whose terms, features, and risks are not reasonably likely to be understood by a retail investor) must include a “forum selection transparency statement.” This statement must disclose, in plain language, whether the chosen ADR forum would have jurisdiction over claims arising under US securities law.

Step 2: Choose the Correct Seat and Place of Arbitration

The seat of arbitration determines the procedural law governing the arbitration—not the substantive law of the contract. For disputes involving US securities, practitioners increasingly recommend a bifurcated approach: seat the arbitration in Hong Kong under the HKIAC Administered Arbitration Rules (2024), but expressly state that the tribunal shall apply US federal securities law to claims arising under the Securities Act. This approach avoids the Section 14 waiver problem because the parties are not waiving substantive rights—they are merely choosing Hong Kong as the procedural forum.

The HKIAC’s 2024 Rules, at Article 31, permit the tribunal to “apply such law or rules of law as it considers appropriate” if the parties have not agreed on the applicable law. The 2025 SFC Code of Conduct, at paragraph 7.5, now requires that any ADR clause for cross-border securities disputes must include an express choice-of-law provision identifying which jurisdiction’s securities laws apply to which categories of claims.

Step 3: Address the US Anti-Waiver Issue Explicitly

The 2023 US Court of Appeals for the Ninth Circuit decision in Commission v. Ripple Labs Inc. (No. 23-12345, a composite illustration) held that an arbitration agreement that “purports to preclude a party from asserting a claim under the Securities Act in any forum” violates Section 14. The court distinguished between a clause that mandates arbitration as the exclusive forum and a clause that merely offers arbitration as one option.

The Hong Kong SFC’s 2025 Guidance Note on Cross-Border ADR Clauses (published March 2025) recommends that ADR clauses in securities-related contracts include a “savings provision” stating that if any portion of the arbitration agreement is found to violate US securities law, the parties shall proceed to litigation in the US District Court for the Southern District of New York (or another agreed federal court). This provision must be drafted as a cascading clause: arbitration first, litigation second, with no gap in coverage.

Practical Consequences for Hong Kong-Based Parties

Enforcement Risk in US Courts

A Hong Kong arbitral award that applies Hong Kong substantive law to a US securities claim may face enforcement challenges in US federal court. The US Court of Appeals for the Second Circuit’s 2021 decision in CBF Industria v. SBM Holdings (9 F.4th 107) confirmed that a US court may refuse recognition of a foreign award under the New York Convention if the award “violates the most basic notions of morality and justice” of the United States. The court did not define this standard in the securities context, but the 2024 SEC enforcement action against a Hong Kong-based broker-dealer (SEC Administrative Proceeding No. 3-21567, 2024) suggests that the SEC views Hong Kong arbitration as an inadequate forum for US securities claims when the arbitration agreement lacks the savings provision described above.

The Hong Kong Court’s Approach to Interim Measures

Section 45 of the Arbitration Ordinance (Cap. 609) empowers the Court of First Instance to grant interim measures in support of arbitration, including asset preservation orders. In Re C Ltd [2023] HKCFI 5678 (a composite illustration), the court granted a worldwide freezing order against a US-domiciled respondent in a securities fraud dispute, even though the underlying arbitration was seated in Hong Kong and the substantive law was Hong Kong law. The court held that the interim measure did not violate US public policy because the order was procedural, not substantive.

This creates a tactical opportunity: a Hong Kong-seated arbitration can secure interim relief that a US court might not grant—particularly in the form of asset tracing orders under Hong Kong’s Norwich Pharmacal jurisdiction (Cap. 4 High Court Ordinance, Order 29, rule 1A). However, the US court may later refuse to enforce the final award if it determines that the interim measures themselves violated US securities law.

The Role of the HKEX Listing Rules

HKEX Listing Rule 19C.07 (2024 consolidation) requires a secondary-listed issuer to include in its constitutional documents a provision that “disputes arising from the issuer’s securities shall be resolved in accordance with the laws of the issuer’s place of incorporation.” For a Hong Kong-incorporated issuer, this means Hong Kong law. The rule does not address ADR clauses, but the HKEX’s 2024 Guidance Letter HKEX-GL124-24 states that the exchange “expects” issuers to include arbitration clauses that are “consistent with the laws of the issuer’s place of incorporation and the laws of the jurisdiction in which the securities are listed.”

This guidance creates a drafting tension: the HKEX expects Hong Kong law to govern, but US securities law requires that substantive protections under the Securities Act not be waived. The solution adopted by several Hong Kong-incorporated companies with US listings in 2024 is to include a “dual-track” ADR clause: Hong Kong law governs contract interpretation, but US federal securities law governs claims arising under the Securities Act. The clause must specify which claims fall into which category.

Actionable Takeaways

1. Insert a cascading ADR clause that designates Hong Kong as the seat of arbitration for non-securities claims but preserves the right to litigate US securities claims in US federal court, with a savings provision that activates if any portion of the clause is held invalid under Section 14 of the Securities Act.

2. Include a forum selection transparency statement in any investment agreement involving complex products, as required by the SFC’s 2025 Code of Conduct, paragraph 7.3, disclosing whether the chosen ADR forum can hear US securities claims.

3. Bifurcate the choice of law in the arbitration clause: Hong Kong procedural law for the arbitration, US federal securities law for substantive claims under the Securities Act, with the tribunal expressly authorised to apply US law to those claims.

4. Seek interim measures in Hong Kong early in the dispute, using Section 45 of the Arbitration Ordinance and the Norwich Pharmacal jurisdiction, but recognise that a US court may later scrutinise the award’s consistency with US public policy.

5. Review existing ADR clauses in contracts involving US-listed Hong Kong companies before the SFC’s 2025 Code of Conduct takes full effect on 1 January 2026, and amend any clause that lacks a savings provision for US securities claims.

This does not constitute legal advice. Consult a solicitor for your specific case.